Thank you to Sherry Slater and Ashley Sloboda for a well-composed and informative article reporting the financial burden the Indiana Michigan Power Co. rate hike would put on schools and businesses (July 28). While all the I&M users can whine to the Indiana Utility Regulatory Commission about their rates, nothing addresses the root cause regarding these rate increases.
The root cause is in the regulatory formulas that allow utilities to set their rates to provide them with a net profit that equates to their weighted average cost of capital times their cost rate base (which would equate to their employed capital).
This brings about some very interesting prospects for a profit-driven utility. Some examples:
• The clients conserve electricity, which results in a 10% decrease in the utility's billing revenue. The net profit drops accordingly, but IURC formulas allow for a rate increase to adjust the net profit back to meet the same return on cost rate base as before. I did a thumbnail calculation for the rate increase adjustment for a 10% drop in the utility's revenue. It came to a little over a 9% rate increase.
• The antics of Aqua Indiana after Aqua America brought its M.O. to our community have been well documented. They bought up smaller utilities and built up the cost rate base to allow them to egregiously increase rates based on their weighted average cost of capital and everything they could get into the cost rate base.
In reading through the I&M petition, they are doing some of the same with their program for smart metering and facility upgrades. There is some justification in that they have both operating cost and needed investments related to tighter air quality standards, particularly on coal-fired facilities such as the Rockport generating plant on the Ohio River.
• The aspect of the formula that bothers me the most is that there is little incentive for productivity improvements. They still get to make the same net profit when they are inefficient in cost and investments. On the other hand, it is their customers who are rewarded for improvements in operating efficiencies through fewer and lower rate increases.
The Indiana Office of Utility Consumer Counselor does a terrific job of representing ratepayers in the IURC arbitration process.Unfortunately, they are not tasked with the responsibility of addressing these well-intended but inadequate formulas for setting rates. They just contest the variables that go into the formulas.
The formulas are the responsibility of the legislative branch, and state legislators seem content with the status quo.
Don Hobbs is a Fort Wayne resident.